Budget before consolidating debt

This is the time of the year when the bills come pouring in. Of course some lenders are trying to take advantage of the situation by running advertisements urging us to take out a new personal loan to consolidate all our small debts. It certainly sounds attractive because you’ll enjoy a lower interest rate and possibly even lower payments.

Don’t fall for it! If you have accumulated a pile of consumer debt now, it’s almost certainly because of bad money management. Of course consolidating your debts will ease the pain in the short term but unless you change your spending habits you’ll quickly accumulate a pile of new debt and be in an even worse situation than before.

Be aware that the interest rate doesn’t matter much if the term is relatively short. For example, if you had $10 000 of personal debt at 15% and re-paid it at $500 a month, you will pay the loan off in 1.9 years paying $1579 in interest. If the interest rate is reduced to 10%, the term will only decrease by one month and you’ll save just $594 in interest.

Instead of getting yourself in more strife by consolidating your debts, you are better off to do a budget and try to find the areas where you can make savings. A simple way to start is to total all your fixed expenses such as loan repayments, rates, insurance and school fees and each pay day deposit a sum into a separate bank account just to pay them. For example, if you are paid fortnightly and they come to $52 000 a year, make sure you bank $2000 out of each pay into that account. This will provide the funds to pay these bills when they come due.

Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is noel.whittaker@whittakermacnaught.com.au